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Economics

Analysis Of The Determinants Of Consumption Expenditure In Nigeria (1985-2015)

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ABSTRACT

This research work examined the determinants of consumption expenditure in Nigeria. Two models were used in this examination. The first, explored the determinants of per capita household final consumption expenditure and the second, examined the determinants of government final consumption expenditure. The data used for this research work was obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin. Although, some variables like per capita gross domestic product, per capita household final consumption expenditure and lagged per capita gross fixed capital formation were technically calculated from data gotten from the Central Bank of Nigeria (CBN) Statistical Bulletin, to explore critically, the determinants of consumption expenditure at the micro level. The researcher employed the use of secondary data in the analysis. Also, multiple regression analysis was used to ascertain the relationships existing between the exogenous variables and endogenous variable. Also, the Engel and Granger Co-integration Test showed the existence of long-run relationship amongst the variables integrated at first difference. The Error Correction Mechanism proved the existence of convergence amongst the variables co-integrated. The results gotten also proved the non-existence of multicollinearity in the models. Our autocorrelation tests indicated the existence of a less severe positive autocorrelation in the second model and the absence of first order autocorrelation in the first model. The White Heteroscedasticity Test showed that the variance of the error term in model one is not constant, while in model two, the test proved a constant variance of the error term. The study concluded that consumer price index and per capita gross domestic product are significant determinants of per capita household final consumption expenditure while, gross fixed capital formation, gross domestic product and national savings determine government final consumption expenditure. However, the study recommends the use of funds for investment rather than savings since gross fixed capital formation affects government consumption expenditure positively. Also, it was recommended that policies that boost national income, gross fixed capital formation, while managing inflation, should be formulated, to accommodate an increase in consumption expenditure and hence, make economic growth imminent.

                                          CHAPTER ONE

                                          INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The myopic consideration of income as a significant determinant of consumption expenditure stimulated this work. This consideration stems from the fact that income may not absolutely determine the consumption level of households or government, as the case may be. Various subjective and objective considerations influence the willingness of consumers to spend their incomes. The decisions people make, to spend part of their disposable income on consumer and capital goods are based on their spending preferences. Keynes (1936), observed in his book that certain psychological drivers may lead individuals to save some of their disposable income rather than spend on consumable goods. Empirical evidences such as in the work of Tomori (1972) showed that consumption is highly influenced by monetary aggregates such as interest rate, money supply and minimum re-discount rate.

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The work of Ajayi, Teriba and Ojo (1974), confirmed Tomori’s findings but also included, family size as an additional determinant to what Tomori had discovered.

It is practically no news, that consumption is an important macroeconomic variable in economic analysis and its estimation is relevant to economic planning and development. Its determinants are important in the determination of economic growth since, by the multiplier principle, an increase in consumption expenditure causes the equilibrium national income to increase magnifically.

The study of consumption plays a central role in both macro and micro economics. Macroeconomists are interested in aggregate consumption expenditure for two reasons; firstly, aggregate consumption determines aggregate savings and secondly, since consumption expenditure account for most of the national output, understanding the dynamics of aggregate consumption expenditure is essential to understanding macroeconomic fluctuations and business cycle.

Alternatively, Microeconomists have studied consumption behavior for many reasons such as using consumption data to measure poverty, to examine household’s preparedness for retirement and to test theories of consumption in retail industries. The determinants of consumption expenditure have influenced Economists like, Friedman (1957), Modigliani (1963), Keynes (1936) and

Duesenberry (1949) to study objectively, the factors that influence consumption expenditure, as whatever influences consumption, plays an important role in the process of economic growth (Branson, 1989).

Consumption decision and behavior is crucial for both short-run and long-run analysis because of its role in determining aggregate output.

In Nigeria, consumption expenditure has been increasing nominally with the gross domestic product. In 1980, the gross domestic product at current market price was valued at N50,846.6 million with consumption expenditure accounting for about 71.2% of this amount, standing at N36,746.1 million (CBN, 2006). According to the CBN Statistical Bulletin (2015), the gross domestic product at current market price was valued at N55,469.35 billion in 2010, N63,713.36 billion in 2011, N72,599.63 billion in 2012, N81,009.96 billion in 2013, N90,136.98 billion in the first quarter of 2014 and N95,177.74 billion in the second quarter of 2015. Expectedly, the government final consumption expenditure followed the same order.

Conclusively, changes in consumption expenditure produces a multiplier effect on the level of national income brought about by the workings of the consumption multiplier.

1.2      STATEMENT OF THE PROBLEM

Economists have held separate views on the determinants of consumption expenditure and this lack of consensus is made explicit in the theories of aggregate consumption expenditure.

According to Nwaru (2006:7), the American government employed many economists during the World War II. One of their tasks was to plan for the eventual demobilization that would follow the war, and this involves predicting the behavior of consumption expenditure during the immediate post war period. It was correctly believed that the demobilization would produce a short-run decline in disposable income, but, it was incorrectly assumed that this decline would be accompanied by a reduction in consumption expenditure. Actually, the exact opposite occurred. In constant 1958 dollars, disposable income fell from $229.7 billion in 1945 to $227.0 billion in 1946 to $206.3 billion in 1947; however, consumption rose from $183.0 billion in 1945, to $203.5 billion in 1946 to $206.3 billion in 1947. This, at that time, proved the Absolute Income Hypothesis, ineffective.

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The inconsistent policies and faulty choice of policy instrument that directly impact the final consumers encumber the effectiveness of the consumption expenditure multiplier in Nigeria.

Given this, it is clear that a lot would have happened, which would have affected the realization of the goals of a developing country like Nigeria and therefore, to redirect growth from the perspective of effective demand, there is need to identify factors that influence per capita household and government final consumption expenditures. The outcome of such result can point or help identify macroeconomic policy instruments that can stimulate household and government consumption in the economy.

1.3      OBJECTIVE OF THE STUDY

The study intends to explore the determinants of consumption expenditure in Nigeria. Specific objectives of the study include to:

  1. Ascertain if consumer price index affects government and per capita household final consumption expenditure.
  2. Determine the nature of relationship between national savings and government final consumption expenditure.
  3. Explore how changes in per capita household final consumption expenditure can be accounted by changes in per capita gross domestic product, consumer price index and lagged by one-year per capita gross fixed capital formation.
  4. Show explicitly other factors that may influence household and government final consumption expenditures.
  5. Determine how gross fixed capital formation affect government final consumption expenditure.

1.4     RESEARCH QUESTIONS

The following are the research questions that aided the research processes:

1.What is the relationship between per capita gross domestic product and per capita household final consumption expenditure in Nigeria?

  1. What is the nexus between the rate of consumer price index and per capita household final consumption expenditure in Nigeria?
  2. How does national savings affect government final consumption expenditure in Nigeria?
  3. What is the relationship between gross fixed capital formation and government final consumption expenditure in Nigeria?

1.5      STATEMENT OF HYPOTHESES

The hypotheses of the study have been derived from some of the objectives of the study. The following hypotheses are carried out in respect of the study:

HYPOTHESIS ONE

Ho: There is no significant relationship between per capita gross domestic product and per capita household final consumption expenditure in Nigeria.

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HYPOTHESIS TWO

Ho: There is no significant relationship between consumer price index and household final consumption expenditure.

HYPOTHESIS THREE

Ho:  National savings does not significantly affect government consumption expenditure in Nigeria.

HYPOTHESIS FOUR

Ho: Gross fixed capital formation has no significant impact on government final consumption expenditure in Nigeria.

HYPOTHESIS FIVE

Ho: Gross domestic product has no significant impact on government consumption expenditure in Nigeria.

HYPOTHESIS SIX

Ho: Lagged by one-year per capita gross fixed capital formation is not a significant determinant of per capita household final consumption expenditure in  Nigeria.

HYPOTHESIS SEVEN

Ho: Consumer price index does not significantly affect government final consumption expenditure in Nigeria.

1.6     SIGNIFICANCE OF THE STUDY

The growth of an economy could be obtained from the relationship that exists between aggregate consumption, income and other exogenous variables. More often, these two variables are being used to ascertain the standard of living of the citizens of a country.

This study is significant because:

  1. It will help policy makers in the formulation of well-articulated policies on consumption.
  2. It will expose to the consumers, the significant determinants of consumption in Nigeria.
  3. It will equally further researchers to carry out researchable proposals or projects pertinent to consumption.
  4. Finally, the study will assist in a modest way to increase students’ knowledge on the practical and real life situations of theories, they learn in the class rooms.

1.7     SCOPE OF THE STUDY

The study is delimited to objective variables such as gross domestic product, per capita gross domestic product, per capita household final consumption expenditure, government final consumption expenditure, national savings, lagged by one-year per capita gross fixed capital formation, consumer price index and gross capital formation. The study also contains available data on these variables, sourced from the Central Bank Annual Statistical Bulletin from periods 1985 to 2015.

1.8      LIMITATION OF THE STUDY

The major limitation the researcher encountered was the occasional discrepancies among the various sources of data, in the search for economic variables.

1.9     DEFINITION OF TERMS

  1. Government final consumption expenditure: It consists of expenditure, including imputed expenditure, incurred by general government on both individual consumption goods and services and collective consumption services.
  2. Per capita household final consumption: This refers to household final consumption expenditure per head. It is the household final consumption expenditure divided by the total population.
  3. Per capita gross fixed capital formation lagged by one year: This refers to the gross net investment (acquisitions less disposals) in fixed capital assets per head, lagged by one year. It is gotten by dividing the gross fixed capital formation by the total population and using the t-1 values for the t years.

Pages:  113

Category: Project

Format:  Word & PDF        

Chapters: 1-5

Material contains Table of Content, Abstract and References.

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